Policy Wise

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I have wondered previously, in the context of global warming, about how energy efficiency and carbon cutting measures might be of economic benefit. This Economist article talks about an interesting study undertaken by Vattenfall, a Swedish power utility, to quantify the economic costs of various emission control measures. (via)

The measures below the horizontal line have a negative abatement cost—in other words, by carrying them out, people and companies could both cut emissions and save money. At a macroeconomic level they would boost, rather than reduce, economic growth.

Apparently, simple measures undertaken by the individual, such as better home insulation and replacing regular incandescent light bulbs with fluorescent ones are the best money saving bet. However, as the Economists notes, these are also the most difficult policies to enforce because the final decision rests with billions of people.

Economists trying to explain this apparent irrationality suggest that the savings are too small and the effort involved in change too large. People find their electricity bills too boring to think about; within companies, those responsible for keeping bills down may not have the authority to spend the necessary capital. Another explanation is the agency problem: that the developer who would have to pay higher capital costs up front will not be forking out for the electricity bills. Besides, people buy houses not because they have good insulation but because they have pretty views.

Compared with pursuing greater energy efficiency, the abatement measures into which so much money is now being poured look rather expensive. Carbon capture and storage and wind and solar power, for instance, all have positive, and relatively high, abatement costs.

But the cheapest sources of abatement are difficult for policymakers to get at. Billions of different actors are involved. They cannot be targeted in the way that a few hundred factories can. What is more, a moderate carbon price is not likely to be effective, since people clearly do not care enough about cost.

Read the whole article for potential policy directions based on these findings.

In this context, it is worthy to note Australia’s recent decision to phase out incandescent light bulbs by 2010.

Also, previous posts on Policy Wise related to the use of fluorescent bulbs.

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